Trillions of Underfunded State Pensions

Counting on your state pension? Think again. KUSI News reported this morning that the $40 billion California Teacher’s pension is underfunded. This is along with many other states and cities across the nation:

According to the report, written by former state Assemblyman Joe Nation of the Stanford Institute for Economic Policy Research, the state’s independent pensions collectively didn’t have enough money to pay for $195-billion worth of obligations to current and future retirees as of June 30, 2008.

Nation based that figure on a “risk-free discount rate” that projected that the funds would earn an extremely conservative average return of 4% a year. California pension administrators consider a 4% return as too low and base their forecasts on average annual returns of between 7% and 8%.

The average funding level, derived by dividing total assets by total liabilities, was only 44.7% for the independent systems, the Stanford study said. That’s virtually identical to a number cited by a similar report earlier this year on the three big statewide pensions: the California Public Employees’ Retirement System, the California State Teachers’ Retirement System and the University of California Retirement System.

The growing obligation could force local governments to devote half of their payroll over the next 18 years to pay for such so-called unfunded liabilities, the study said.

According to Stanford, worst-case estimates for various Los Angeles-based retirement systems hit as high as nearly $40 billion as of mid-2008: the Los Angeles County Employees’ Retirement Assn. had $39.7 billion, the Los Angeles Fire and Police Employees’ System $14 billion, the Los Angeles City Employees’ Retirement System $13 billion and the Los Angeles Water and Power Employees’ System $8 billion.

The Stanford report “confirms that all levels of government have been understating the pension debts owed by taxpayers to government workers,” said outgoing Gov. Arnold Schwarzenegger. He recently reached an agreement with lawmakers and some government workers unions to cut future pension benefits for new state hires.

Washington Examiner reported December 4, 2010:

Cities and counties alone face an estimated $574 billion in unfunded public pension liabilities, a recent Northwestern University study found. Philadelphia ($9.7 billion in unfunded liabilities), Boston ($7.5 billion) and Chicago ($44.8 billion) are all projected to run out of pension money by the end of this decade. Their problems only compound the multitrillion-dollar problem of unfunded state pensions.

So how do you force states and municipalities to be open and honest about their pension liabilities? Nunes thinks he has the answer, and Reps. Paul Ryan, R-Wis., and Darrell Issa, R-Calif., agree. Last week, the three introduced the Public Employee Pension Transparency Act, which would use what leverage the federal government already has to force a truthful disclosure of public pension liabilities.

Every year, America’s smaller governments issue bonds that have an advantage over other forms of debt. Provided that the issuers meet all of the criteria under federal law, interest from these bonds is exempted from federal taxes. This augments the after-tax yield of state and municipal bonds, making them compare more favorably with other conservative investments, such as corporate bonds. This indirect subsidy from Uncle Sam to local governments comes to about $40 billion annually.

Nunes’ bill, in addition to barring future pension bailouts by federal taxpayers, simply adds a requirement for state and local governments that want to issue tax-exempt bonds. Unless they hand over complete information on the health of their pension funds to the U.S. Treasury Department, they won’t qualify for the treasured tax exemption. You want to borrow money and build that new school or town square? Then show us your books.

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